MPC was unanimous in maintaining rate even with inflation going down

 Durrant Pate/ Contributor

The Bank of Jamaica (BOJ) has agreed to continue to hold its policy interest rate at 7.0% to maintain tight Jamaican dollar liquidity and to foster relative stability in the foreign exchange market.

The policy interest rate is the rate offered to deposit-taking institutions (DTIs) on overnight placements with the BOJ. The decision by the BOJ’s Monetary Policy Committee (MPC) to hold the policy rate at 7% for another month was unanimous and was taken notwithstanding a continued downward trend in headline inflation to 5.8% at April 2023.

At its meetings last Wednesday and Thursday, the MPC took the view that “although the incoming data were generally positive, the inflation rate may temporarily rise again above its inflation target range over the next three to four months. The Committee was satisfied that its monetary policy actions since October 2021 have been effective in achieving their objectives but noted the need to maintain the policy stance until inflation is firmly contained within the 4.0 to 6.0%.”

Domestic inflation continued to ease

In coming to its decision, “the MPC noted that domestic inflation has continued to ease, consistent with the Bank’s monetary policy stance and international developments. Jamaica’s headline inflation rate at April 2023 of 5.8% was marginally below the Bank’s expectations and represented a return to the target range for the first time since July 2021.”

Core inflation (which excludes food and fuel prices from the Consumer Price Index) at April 2023 was 5.7%, well below the outturn of 8.4% at April 2022. The key external drivers of headline inflation, such as grains, fuel and shipping prices, continued to decline, broadly in line with the Bank’s expectations. 

The BOJ explained that in addition, inflation expectations continued to trend downward. As anticipated, the pace of monetary tightening by the United States Federal Reserve Board has slowed, and recent developments suggest that interest rates in the US are at or near their peak.

Small adjustments to rates on deposits and loans

In reviewing the impact of previous monetary policy decisions, the MPC took note of the fact that interest rates in the domestic money and capital markets and the term rates offered on deposits by DTIs have generally increased in line with the policy rate, and the DTI sector continued to make small adjustments to rates on saving deposits and loans. Respondents to BOJ’s Quarterly Credit Conditions Survey indicated that credit terms were expected to tighten further for the June 2023 and September 2023 quarters. 

The flow of new loans to the private sector has declined appreciably in real terms over the six months to March 2023 by 6.5% and generally reflects the impact of higher interest rates and the tightening in credit conditions. The MPC was of the view that the maintenance of tight liquidity in the financial system and the preservation of relative stability in the foreign exchange market have had a significant impact on limiting the pass-through of imported inflation to inflation in the Jamaican economy. 

In addition, in the context of the stability in the foreign exchange market, deposit dollarisation continued to trend downward.At the same time, the MPC noted that the domestic banking system remains sound with adequate capital and liquidity.

The BOJ reported that “there are likely to be temporary upticks in inflation above the target range during the June and September 2023 quarters, affected by recent increases in the cost of communication services, the national minimum wage, seasonally higher agricultural prices as well as pending increases in other regulated prices such as transport costs.”

Inflation projection

However, consistent with global consensus forecasts for a fall in commodity prices and the Bank’s overall monetary policy stance, and in the absence of new shocks, inflation is projected to generally trend back towards the Bank’s inflation target range of 4.0 to 6.0 per cent by the December 2023 quarter.  The risks to the inflation outlook are balanced. 

Higher-than-projected future wage adjustments, a stronger-than-anticipated impact of climate change on domestic agricultural prices and a worsening in supply chain conditions could put upward pressure on inflation. Further, higher-than-projected interest rates among major developed economies could worsen the interest differential, increase the pace of depreciation in the exchange rate and cause higher inflation.

The date of the next policy decision announcement is June 29, 2023.